Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.
Let's examine how Snyder's-Lance
1. Yield
First and foremost, dividend investors like a large forward yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.
Snyder's-Lance yields 3% -- moderate and certainly worthy of further investigation.
2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford, even when its dividend yield doesn't seem particularly high.
Snyder's-Lance's payout ratio is 187%. On a free cash flow basis, the payout ratio is 180%.
3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than five is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.
Snyder's-Lance's debt-to-equity ratio is 33%. Its interest coverage rate is 25 times.
4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Let's examine how Snyder's-Lance stacks up next to its peers:
|
Company |
5-Year Annual Earnings-Per-Share growth |
5-Year Annual Dividend Growth |
|---|---|---|
|
Snyder's-Lance |
(18%) |
0% |
|
Flowers Foods |
17% |
25% |
|
Hain Celestial |
11% |
- |
|
J&J Snack Foods |
12% |
10% |
Source: Capital IQ, a division of Standard & Poor's.
The Foolish bottom line
Dividend investors will want to watch the company to see if earnings can grow enough for the payout ratio to become more sustainable or for the dividend to be reduced somewhat. Snyder's-Lance has low enough leverage that it might be able to support its dividend for some time with debt and share offerings, but over time that's not entirely sustainable. Recent merger charges have dinged the company's profit, but those should be non-recurring, meaning that income could return to more typical levels.
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